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Try To Keep Savings On An Even Keel

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The Tampa Tribune

Published: July 6, 2008

Save early, save often. That's the mantra of the financial-services industry.

But the other side of the equation - those of us who are saving too much - is rarely discussed.

I know. You've been told again and again that you can't save too much; it just isn't possible. But recently, the tides have started to turn on that theory a little bit. One proponent of the newer message - that some people may be overestimating their retirement needs - is Larry Kotlikoff, an economist at Boston University. Kotlikoff has co-authored a new book with financial columnist Scott Burns titled "Spend 'til the End: The Revolutionary Guide to Raising Your Living Standard - Today and When You Retire" (Simon & Schuster).

The book focuses on what Kotlikoff calls consumption smoothing. "We're not interested in having a fantastic living standard in retirement if we have to starve beforehand, nor do we want to splurge today and starve tomorrow," he says. "The goal is to figure out how much you need to save in order to have the same living standard in the future that you have in the present," explains Kotlikoff.

An appealing notion, if I ever heard one. Here's how to put it into practice:

Find your target. General rules of thumb that advocate saving 15 percent of your salary are really no more than a starting point. Adding up your expenses now and applying that figure to the number of years you plan to spend in retirement doesn't get much closer, because chances are a few things on that list - a mortgage payment, saving for college - won't be a consideration in your 60s and 70s. So what to do? Nearly every major financial institution and personal finance magazine has a calculator on the Web, and I tend to think that, in general, these are a good place to start, provided that the information you plug in is correct. Kotlikoff, however, says that in some cases, these tools can be way off - sometimes shooting back numbers that are five times too high.

Keep on top of it. Whether you work out your goal with pen and paper, or an online tool, accuracy comes with regularly checking your progress to ensure that you're still on track.

"With a number of the tools out there, you can go in and rerun your numbers to see if your likelihood of running out has increased significantly. That will help you decide whether you've been too cautious," says Christine Fahlund, a senior financial planner with T. Rowe Price.

Know how to catch up - or, slow down. If you find that you're either ahead or behind in your retirement saving - these are equally important problems - you need to make some adjustments to your strategy. If you're ahead of your savings goals but you still have a mortgage, one of the best things you can do is pay it off, Kotlikoff says.

If you find that you're behind, and you already feel strapped for cash, one of the best things you can do is delay your retirement by a year or two. Not only will it allow your money more time to grow, but you'll generate a bit more income to contribute.

Time Social Security carefully. This is huge. Sure, you can tap Social Security when you turn 62. But waiting a few years can have a tremendous impact on your financial security in retirement.

"Every year you wait, the Social Security formula increases payments by about 8 percent, and then on top of that, Social Security adjusts for inflation. So it could be that you're getting a nine, 10 or even 11 percent increase for every year you wait," Fahlund says. Numbers like that mean you might be well advised to spend some of your investments before tapping into Social Security.

With reporting by Arielle McGowen. Jean Chatzky is an editor-at-large at Money Magazine and serves as AOL's official Money Coach. She is the personal finance editor for NBC's "Today Show."

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